Long Term electricity bilateral contracts

Mathematical models

Electricity markets offer a way to trade on a hourly/daily, basis quanti=
ties of electricity at a given price. The short term producer's maximum pro=
fit problem has been discussed in another section. However for risk manage=
ment reasons the producers may want to stipulate longer term bilateral cont=
racts with third parts, i.e. (large) consumers. The problem of defining the=
amount and the price of such over the counter transactions can be seen as =
an simulation/optimization one. It is also a simulation problem since the l=
ong term horizon calls for the estimation of the future conditions of the s=
pot market, that remains an alternative. Although rare, a producer, especia=
lly a small one, may in fact want to go spot for all its capacity. The fina=
l goal is indeed maximizing the profit while mantaining a certain - quantit=
y and price - risk.

Modeling and algorithmic considerations

From a modelling standpoint, the bilateral contract definition, involves=
, the price risk profile and the future conditions of the spot market. More=
over the bilateral contracts are typically equipped with hourly profile (or=
blocks of hours) of demand from the counterpart. Therefore the inclusion o=
f some simplified technical constrains of the power plants must be consider=
ed (at least maximum capacity and ramp constraints). All in all, given a ce=
rtain demand profile requested, the problem can define as variables price a=
nd quantity and try to optimize a custom objective function that takes into=
account the revenues, the costs, and the risk reduction with respect of pu=
re spot trading along the considered horizon.